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14.08.2019 04:50 PM
USD/JPY. The yen is back on the horse: the situation in the debt market provoked panic

The anti-risk sentiment "rule the ball" in the financial markets again. Although Donald Trump postponed the introduction of additional duties on Chinese imports until December 15, traders' concerns about the impending global economic crisis are only growing. On the wave of general nervousness, the demand for protective assets, including the Japanese currency, is growing. After all, following the slowdown in key indicators in Europe and China, another alarming signal was received.

Thus, the yield of two-year US Treasury securities fell below 10-year today – for the first time in the last 12 years. Also, in early August, the yield of 10-year Treasuries fell below the yield of three-month bonds. This fact seriously alarmed the market participants, as similar trends were observed in anticipation of the 2008 crisis. Not only then: over the past 70 years, the inversion of the curve preceded almost all recessions in the States – the signal was false only in the mid-sixties (but even then the American economy slowed significantly).

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Against the background of panic, the market became interested in the yen again. After the release of data on the growth of US inflation, the pair USD/JPY showed a significant correction to the border of the 107th figure (the pair passed more than 200 points to the North). But today, the southern trend reminded itself – the yen is again a favorite of the foreign exchange market. Even such possible prospects as a rate cut by the Bank of Japan do not deter investors. The situation in the US debt market has a wider impact not only on the dynamics of the foreign exchange market but also on the stock and raw materials.

According to some experts, the inversion of the yield curve is an early warning signal: the time gap between lightning and thunder is from 6 to 10 months. But here, it is worth recalling that the talk of the impending recession over the past year and a half arise on the market regularly. For example, in March last year, the yield curve was in the process of flattening (the difference in rates narrowed): the differential of ten-year and two-year Treasuries decreased to 0.54%. Reacting to this fact, the pair USD/JPY similarly fell by more than 200 points, from the 106th to the 104th figure (to be more precise, to 104.60).

Then the impending economic recession began in December 2018 – the yield of 10-year bonds fell to multi-month lows, and the yield spread of 10-year and 2-year Treasuries fell to a minimum of more than 10 years. The narrowing of the spread between short and long-term US government bonds was discussed earlier – both in 2016 and in 2017, expressing corresponding concern. But then the spring expanded again, and the market switched to other fundamental factors. On the one hand, such an excursion into the recent history allows us not to panic today, on the other hand, it is still alarming that such signals are being given by the American debt market more often. The last time the yield curve of Treasuries with terms of 3 months and 10 years was inverted in March this year: first, the yield of 3-month bonds coincided with the indicator of 10-year government bonds (at 2.455%) and then exceeded this value.

The situation in the stock markets of other countries also indicates a certain trend – government bonds with long maturity are becoming more expensive, while their yields are declining. In particular, for the first time in history, the yield of 30-year German government securities decreased by 10 basis points to -0.002%. Similar trends are observed in other countries, particularly in the UK. Thus, there is a general nervousness in the foreign exchange market, which is associated with fears of a slowdown in the global economy and the risk of a repeat of the crisis of 11 years ago. Against this background, the Japanese currency is in demand again, despite the announced "thaw" in relations between the US and China. According to some experts, the "point of no return" has already been passed, and the temporary postponement of new duties will not change the situation as a whole. The barriers have been on the rise for more than a year, and this fact provoked a domino effect, which in the end can lead to a recession of the American economy (and not only the American one).

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Given these prospects, many fundamental factors are relegated to the background. In particular, the growth of US inflation was drowned out by panic about the inversion of the yield curve. The postponement of the introduction of new duties also did not have a proper impact on the market – the anti-risk sentiment in the markets continues to grow.

Thus, the current fundamental background contributes to the strengthening of protective instruments, where the yen is the undisputed favorite. If traders' nervousness about the "return of 2008" will increase, the pair USD/JPY will not only update the low of this week but also test the main support level of 104.90 (the lower line of the Bollinger Bands indicator on the daily chart).

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